Further to the post on Character Group (CCT) which as mentioned has scored well on the Compound Income Scores (CIS) for a while. Coincidentally after today's weekly update of the Scores it has come out at the top of the list.
So if that was of any interest to you and you would like to find other good quality stocks which offer value with growing well covered yields, then don't forget you can read more about the background to the thinking and research behind them by clicking here. There you will find links to sign up for access for the equivalent of just £1 per week, or you can sign up straight away by clicking here if you wish.
I also mentioned that Character Group has featured in the Compound Income Score Portfolio for some time. If you are not familiar with it, this is a portfolio that is based on top scoring stocks in the Scores and was started in April 2015. Since then it has outperformed the All Share Index by just over 7%. This was originally screened and updated on a quarterly basis, but this year it has been re-screen and comes with refreshed Compound Income Scores at the end of each month. So if you are only investing occasionally or on a monthly basis then that may be of interest to you perhaps? You can read more about the background to the portfolio and how to gain access to it by clicking here. This plan (portfolio and monthly updated scores) is available at the same price as the weekly updated scores which is equivalent to around £1 per week. Please note both these plans, the weekly Scores and the Monthly Portfolio & Scores , are also available via monthly payments - please get in touch if that is of any interest.
I'll endeavour to getting around to putting the performance numbers for this on the website and will try and remember to share a 6 month update at the end of the month.
Any way the weekend beckons, have a good one whether you are at work, resting or playing and good luck with your investing next week and beyond too.
Here is a quick review of what might be an interesting little play down here which is a stock which has been in the CIS Portfolio for a while now and as a result is currently the position with the largest unrealized gain. I say play because the stock concerned is Character Group (CCT) the AIM listed £95m market cap. toy manufacturer. Now if that doesn't prejudice you against it then why do I think you should take a look at it? Well first up it Scores well on the Compound Income Scores (CIS) and it has done for a while, as it has generally been consistently cheap as the market has tended to be fairly sceptical about it given the nature of the business and its somewhat chequered past. Depsite this though the Company has delivered decent results fairly consistently in the last few years and as such I believe it might be worthy of further consideration.
Just last week they had an in line trading update in which they highlighted two new ranges, one based on the old Hasbro character Stretch Armstrong (see image above which you can click to read more about it) and the other being something called Twozies which is a girls collectible item apparently. They also flagged that a significant proportion of the Company's purchases are made in U$ dollars and, therefore, the increasing strength of the US$ against Sterling continues to put pressure on Group profitability. Nevertheless, the Board remains of the view that it can continue to mitigate the resulting increased costs. This is being achieved through the expansion of their international business, which generates revenue and profit in US$'s, and by their continuing active programme of monitoring all costs and rationalising operations where possible through increased efficiencies. They also flagged their strong balance sheet which showed cash of nearly £15m recently and they also suggested this had strengthened further thanks to working capital management and cash generation.
Despite this update and reassurance the share price has come off by around 10% in recent weeks (see chart at the end) which leaves it close to being oversold and looking good value on under 10x this years forecast earnings (which they have just confirmed) and with a yield of over 3% which is more than 3x covered and backed by a cash backed balance sheet, so that looks pretty secure too. It is also worth noting they have grown this at over 20% per annum for the last 5 years and this years forecast dividend of 14p is also therefore expected to be up by over 20% on last years 11p. Perhaps the market was hoping for a better update and another round of upgrades. More likely someone has perhaps been reducing their holding in an illiquid stock a fact which they flagged in a recent update about their share buy back policies. Following on from that they have today announced that they have bought back just over 1% of the share capital 447p & 448p. In addition to which I note that the FD and a non executive director also bought shares recently. So members of the board and the Company, who have been quite good with share buy backs in recent year, seem to think it is reasonable value down here too. The only holder I could see who reduced earlier in the year was Miton who went from over 5% down to 3% or so. Perhaps they have now gone below 3%, guess we'll have to wait and see if there is an announcement on that in due course.
In conclusion I would tend to agree with the board that this looks good value down here as it also has an earnings yield of nearly 15% (EBIT/EV) and based on their recent operating margins of around 10% or more the EV/ Sales for this year of 0.72x also look pretty reasonable too. Technically though the shares have been stuck in a sideways range between about 440p and 560p for the last year or more so at least you would not be buying in at the top but does suggest, at a stretch, possible returns of 20%+ if it can make it back to the top of that trading range.
I wrote about Mondi (MNDI), the global packaging group back in April 2014 here and here, which looked cheap at the time and has done well for me since then. More recently, in July this year, the Compound Income Scores (CIS) portfolio had picked up a holding in another smaller packaging company called Powerflute Oyj (POWR) at 70p thanks to its high score in the Compound Income Scores & the fact that it looked cheap in comparison to its bigger rivals like Mondi. This stock was in the news yesterday as the founding Chairman Mr Smurfit, who has a long history in the packaging industry, has decided to sell out his large holding and thereby facilitate a takeover bid for the whole company at the 90p level. Now while this still seems to be a bit cheap and not that great a premium to the recent price, it probably reflects Mr. Smurfits desire to sell his large stake and get the deal done. Thus being recommended and with over 50% of the shares either bought or where they have received irrevocable undertakings to accept it looks like a done deal.
This is the first holding in the CIS Portfolio to attract a bid, so what lessons can we learn from it? Well as ever value investing can be rewarding if you are prepared to look in out of the way places or be a bit contrarian. Now the Compound Income Scores are not necessarily contrarian as they do include estimate revisions, but they do otherwise tend to highlight stocks which offer good value, quality, financial security and which offer growing dividends. They also highlight stocks, like Powerflute, which may not be that palatable at first glance. At least in this case they prompted me to take a closer look and benefit from the recent move in this one.
More broadly given this looks like a done deal as Mr. Smurfit seems keen to exit this does give me pause for thought, given his experience of this cyclical industry. I also note that quite a few VC led IPO's (new issues) are opportunistically coming back out of the wood work again now which suggests to me that the market is getting quite fully valued and may be getting a bit toppy. Added to that are the concerns about the US Fed raising rates again, perhaps this month, or more likely by the end of the year at a time when US economic data has been a bit mixed. I continue to watch the US unemployment data closely to see if it breaks upwards through its moving average, but so far it has remained below, as this has in the past been a good lead indicator of a forthcoming recession. Thus I am also getting a bit more wary of more cyclical stocks and in light of that I reduced my Mondi holding recently when it was over 1600p.
As for the Powerflute holding in the CIS Portfolio, this will be reviewed at the next monthly re-screening at the end of this month and as it looks like a done deal I'll probably use it as a chance to lock in a decent 25% profit and move onto the next opportunity. So if you would be interested in finding out what that turns out to be or in getting access to the Scores yourself then you can read more about them and how to subscribe to the Scores here and the CIS Portfolio here.
Further to last months update on the simple market timing indicator based on the 10 month moving average. The Us employment data came in a little weaker than expected, against the recent trend, but still just below its moving average, which is good.
This means that markets seem to have moved from discounting a possible rate rise this month to now expect one possibly in December. In this case bad news is therefore good news and should further help to support the markets in Q4. I wouldn't get too bullish in the short term though as there is still the possibility of an autumn shake out, as it often the case and given the rise we have seen post BREXIT may be running out of steam?
August was another positive month for the UK equity market as the post BREXIT recovery continued as the problems suggested by project fear / remain campaigners have in the main failed to materialise in the short term. In fact the only thing that they predicted that has really come to pass is weaker Sterling. This has in fact also been a double edged sword as it has potentially actually benefited exporters and helped with the translation of profits for those companies with overseas earnings and dividends.
Any way this leaves all the UK indices from Small Cap up to FTSE well above their 10 month averages by around 8 to 9%, although unusually the Mid 250 remains something of a laggard being only around 6% above its moving average. Meanwhile the US Unemployment rate remains just below its average which is supportive too, but it will be interesting to see if this afternoons numbers make any difference to this. Even if US Unemployment does turn upward through its average this will not be a sell signal until the Indices cut down through their averages.
Looking at the data it seems unlikely that this will happen for the rest of this year, unless we see a rapid 8 to 10% correction this autumn, which is always possible as seasonally this has been a volatile period in the past and as Mark Twain said October is a dangerous month to invest. With more talk of a possible US rate rise this month (I'll believe it when I see it) I guess a correction could be possible.
In the absence of that though, things seem set fair for now and the indices should remain above their averages for the rest of the year as there are lower numbers from the end of last year and early this year still to drop out of the calculation. Thus it seems the bull market which started in spring 2009 may stagger on for a while yet thanks to the on going support from Central Banks and the unattractiveness of competing assets such as bonds with small or even negative yields and no immediate catalyst for the start of a bear market.